Q = kAawhereQ = the quantity sold due to promotionk = scaling constantA = the amount of money spent on promotiona = the elastisticity of promotion (0This relationship is discussed in Kotler’s classic textbook on Marketing Decision Making (1971, p.48) and more recently in Marketing Metrics by Paul Farris et. al. (2006, p.319). Sales are always increasing as the amount of promotional effort is increasing but the incremental rate is decreasing. This type of power function was at the heart of the students’ marketing simulation so that they would learn the lesson that over spending or under spending on promotion would generate less profit. The students were given the goal of finding the optimal level of promotion that would maximize profits. The instructors had wrongly assumed that high er promotional efficiency, MROI, was always associated with higher profits. However, when the students adopted the goal of increasing their promotional efficiency, MROI, then they would discover that higher levels of promotional efficiency could lead to lower profits.Figure 1: Sales as Function of Promotional Expenditures
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